Home News Featured News ST article praising CPF system does not take into account its limitations

ST article praising CPF system does not take into account its limitations




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By Chris Kuan

The ST journalist writing this article can’t help himself but promote that often repeated piece of intellectual hogwash of comparing the CPF Ordinary Account rate of 2.5% to average bank deposit rates of 0.24%. The fact that the OA can be used for housing purchase and other specific purposes does not make it equivalent to a bank deposit which imposed no conditions whatsoever.

Do remember when you sell your property, the funds go back to the OA making the “withdrawal” much more like a “loan”. Given that you are unable to use your CPF without conditions (save the MS) until you are 55, your OA is more akin to a 20 year interest bearing asset than a bank deposit.

So the comparison between the two rates to show CPF is a good deal, is …. well I leave you to use any word you deem appropriate for it.

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As for the MS which goes into the RA and used for CPF LIFE, we are really talking about a 40 year interest rate bearing asset. One can argue that both the OA and SMRA rates are higher than actual and implied (i.e. extrapolated) government government bond yields but do remember investments such as the OA which imposes conditions on limited withdrawals and the SMRA no withdrawal at all, are illiquid investments compared to government bonds.

The illiquidity is a risk and an economic opportunity cost that require additional yields in comparison to liquid investments such as government bonds. So do not think just because the OA and SMRA rates are higher than government bond yields that they are a gimme.

The argument may be on firmer ground if it is couched in terms of relative returns. Given the collapse in global bond yields in the last 3-4 years, the CPF rates indeed have looked better by being left unchanged.

But remember they were shitty for a long time on a comparative basis until global bonds yields collapsed to the extent we have seen. Which makes me arrive at a horrible thought ….. this is a ready made excuse for the government to reduce the OA and SMRA rates.

*Edited for clarity

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